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U.S. Department of State
Russia Country Commercial Guide
Office of the Coordinator for Business Affairs
COUNTRY COMMERCIAL GUIDE - RUSSIA
FY 1996
U.S. EMBASSY MOSCOW
JUNE 30, 1995
Table of Contents
I. Executive Summary
II. Economic Trends and Outlook
III. Political Environment
IV. Marketing U.S. Products and Services
V. Leading Sectors for U.S. Exports and Investment
VI. Trade Regulations and Standards
VII. Investment
VIII. Trade and Project Financing
IX. Business Travel
X. APPENDICES
A. Country Data
B. Domestic Economy
C. Trade
D. Investment Statistics
E. U.S. and Country Contacts
F. Market Research
G. Trade Event Schedule
This Country Commercial Guide (CCG) presents a comprehensive look at
Russia's commercial environment through economic, political and market
analyses.
The CCGs were established by recommendation of the Trade Promotion
Coordinating Committee (TPCC), a multi-agency task force, to consolidate
various reporting documents prepared for the U.S. business community.
Country Commercial Guides are prepared annually at U.S. Embassies
through the combined efforts of several U.S. government agencies.
I. EXECUTIVE SUMMARY
Overview of Import Market
A country of 150 million-plus people with tremendous natural and human
resources is not a market which U.S. business can afford to neglect for
long. Russian demand is present across the board from consumer goods to
capital equipment. Foreigners, foreign products, and foreign ideas are
now common in Russia today - a sharp contrast from a few years ago.
U.S.-Russian trade has increased significantly. Two-way merchandise
trade with Russia in 1994 was a record $5.9 billion and U.S. exports in
the first quarter of 1995 increased 9.3% over the same period in 1994.
U.S. imports from Russia increased 125% over the same period in 1994.
There are no significant legal barriers to the import market, but there
are a number of factors which discourage trade.
Brief Synopsis of Commercial Environment
The Russian Federation is currently a country in economic, political and
social transition of comparable scope and consequence to the fall of the
Tsarist regime in the early part of the 20th century. The duration and
final outcome of this process are unknown. As a result, uncertainty,
high risk, as well as great opportunity, characterize the commercial
environment in Russia today. Doing business in Russia is not for the
timid, but for the bold. Fees, import licenses, export licenses, and
other government regulations are subject to frequent change - often
without notice. Taxes are continually in flux and are often applied not
just to profits, but also to revenue, making business operations at
times uneconomical. A business legal system is lacking. Contract law,
commercial codes, and legal enforcement of private business agreements
are almost non-existent. An Executive-Parliament consensus seems to be
gelling to proceed with market reforms, the liberalization of foreign
trade rules and regulations and the reduction of some taxes. This
consensus will be essential for the commercial environment to stabilize
and improve.
Russian Business Attitude Toward the United States
Russian firms and customers admire U.S. technology and know-how and
generally want to do business with U.S. companies. In the Russian Far
East, a strong U.S. commercial presence is viewed as a positive
counterbalance to other regional economic powers.
Major Business Opportunities
There are few products or services which are not in demand in Russia. A
wide range of U.S. consumer goods manufacturers - Procter & Gamble,
Coca Cola, Mars - have already made Russia a major expansion market for
their companies. In many of the industrial sectors identified as
priority by the Russian Government, such as oil and gas,
telecommunications, aerospace, health care, mining and defense
conversion, there are numerous commercial opportunities for U.S.
exporters and investors. Trade finance is a key to success in this
market.
Major Roadblocks to Doing Business
U.S. and other foreign companies operating in this market encounter
major difficulties to both trade and investment, including the
following:
-- ownership and jurisdictional disputes;
-- financial illiquidity of a majority of Russian firms;
-- lack of a normal commercial market;
-- absence of a commercial legal framework;
-- high cost and general difficulty of doing business;
-- severe infrastructure problems (telecom, roads,
-- banking system, ports, etc.)
-- payments arrears and frozen accounts;
-- frequent changes in government and firm personnel;
-- high taxes which frequently change;
-- frequent changes in the import and export regime;
-- lack of systematic and accessible credit information;
-- mounting crime and corruption
Notwithstanding all of the above, business is being conducted. U.S.
firms are exporting and investing. Activity at the microeconomic level
is vibrant, with new goods and services appearing on the Russian market
almost daily. The number of U.S. firms opening in Russia is expanding
and those with the right product or service, the right local contacts,
business associates and street smarts are making money.
Nature of Local and Third-Country Competition
Western European firms, particularly those from Germany, Italy, Austria,
France and the United Kingdom offer U.S. business the most competition.
Direct flights by Lufthansa from Frankfurt to the Russian Urals
(Yekaterinburg) and to Siberia (Novosibirsk) have stimulated western
European business interest in these parts of Russia. Scandinavian firms
are particularly active in northwest Russia and Chinese, Korean and
Japanese firms are very aggressive in the Russian Far East. Better
credit terms often give the advantage to western European firms.
The opening of U.S. Consulates General in Vladivostok in the Russian Far
East and in Yekaterinburg in the Urals is facilitating U.S. firms'
ability to do business in other than the Moscow and St. Petersburg
regions and helps balance the growing Chinese, Japanese and Korean
commercial influence in the Far East and the German strength in central
Russia. American Business Centers operating in St. Petersburg,
Vladivostok, Khabarovsk, Novosibirsk, Yekaterinburg, Nizhnevartovsk,
Nizhny Novgorod, Volgograd, and Chelyabinsk (and shortly in Yuzhno-
Sakhalinsk) have been of significant assistance to U.S. companies
exploring the tremendous commercial opportunities in the Russian
hinterlands. Growing commercial air connections are making it easier to
reach the Russian Far East: Korean Airline and Alaska Airlines provide
weekly service to cities in the region.
Country Commercial Guides are available on the National Trade Data Bank
on CD-ROM or through the Internet. Please contact STAT-USA at 1-800-
STAT-USA for more information. To locate Country Commercial Guides via
the Internet, please use the following World Wide Web address:
WWW.STAT-USA.GOV. CCGs can also be ordered in hard copy or on diskette
from the National Technical Information Service (NTIS) at 1-800-553-
NTIS.
II. ECONOMIC TRENDS AND OUTLOOK
Major Trends and Outlook
On March 10, 1995, the Government and Central Bank of Russia announced a
bold economic stabilization program for 1995 -- a major breakthrough on
Russia's path to economic reform. Russia's economic team, headed by
First Deputy Prime Minister Chubays and supported by the President and
Prime Minister, worked for months with the IMF and the Parliament to put
together an economic policy agenda consisting of a tight budget,
restrictive monetary policy, and trade and energy sector liberalization.
The government's stabilization program formed the basis for a $6.5
billion standby credit from the IMF, scheduled for monthly disbursement
through 1995 and the early part of 1996.
After four years of large annual declines in Gross Domestic Product
(GDP) and industrial production, the Russian economy is showing signs of
stabilizing in 1995. Real GDP dropped 15 percent in 1994 over 1993, but
has slowed its decline considerably in the early part of 1995. Real
industrial output, while continuing to decline in annual average terms
(down 21 percent in 1994 over 1993), stopped falling from the summer of
1994, and certain sectors show signs of recovery for the first time
since the beginning of market reforms. Official statistics indicate
steady growth in trade and services, sectors that were admittedly
underdeveloped under the centrally planned economy of the former Soviet
Union. By mid-year 1995, services grew to comprise 50 percent of GDP,
while manufacturing shrunk in GDP terms to less than 44 percent.
Unemployment has risen steadily over the past few years, from nearly
zero to 7.5 percent of the workforce in June 1995. In certain depressed
regions and sectors, unemployment is much higher, in contrast to the
very low unemployment rate in Moscow. Experts estimate that another 7
percent of the workforce is currently underemployed -- on unlimited
unpaid furlough or working only part time. Studies indicate that many
of the underemployed are content to keep their wage positions in order
to receive the social benefits provided by the enterprise, while
supplementing their income by growing food at home or working in the
informal economy. Because most of Russia's large industrial enterprises
continue to employ too many workers, experts expect unemployment to
continue to increase steadily. Average wages reached 385,000 rubles per
month in April 1995 (about $75 a month at the end-April exchange rate).
Real average wages (adjusted for inflation) continued their general
decline in 1994 and early 1995. (In the first four months of 1995 real
average wages posted a 29 percent decline over the same period in 1994.)
In contrast, real average income increased significantly in 1994 --
another indication that many Russians earned extra income outside of
their regular jobs -- before falling off somewhat in early 1995. (In
the first four months of 1995, real average income declined 8 percent
over the same period in 1994.)
Inflation has been falling since the beginning of 1995, in line with the
government's commitment to non-inflationary financing of the federal
deficit. Annual inflation (CPI) ran at 303 percent in 1994, down
substantially from the almost 900 percent annual inflation registered in
1993. Average monthly inflation in 1995 has fallen from a peak of 18
percent in January to just under 8 percent in May, and experts expect
the trend to continue through the end of the year.
The ruble abruptly broke the predictable but slow decline which marked
the first eight months of 1994 with a 22 percent one-day drop against
the dollar on October 11, also called "Black Tuesday". Within 48 hours
the ruble regained its pre-fall level of approximately 3,000 rubles to
the dollar. Repercussions from Black Tuesday were harsh and Central
Bank Chairman Gerashchenko, Deputy Prime Minister Shokhin, Acting
Finance Minister Dubinin and the head of the Federal Service for
Currency and Export Control were all eventually removed from their
posts. Official inquiries found that lax credit policy, combined with
poor management of currency intervention by the Central Bank,
contributed to the ruble's fall. In 1995, after three months of steady
decline in line with inflation, the ruble stabilized in mid-April in a
narrow band around 5,000 rubles to the dollar and appreciated 10 percent
as of the print date of this publication in mid-June 1995.
Interest rates, both the Central Bank's official discount rate and 3-
month interbank market rates, fell for the first nine months of 1994,
but rose abruptly in response to the ruble's fall on Black Tuesday.
Respectively, these rates ended 1994 at 200 and 174 percent (in simple
annual terms). In April 1995, the Central Bank lowered the discount
rate five percentage points to 195 percent, while 3-month interbank
market rates have fallen dramatically, and as of mid-June they were just
under 95 percent.
Principal Growth Sectors
Overall Russian industrial production, after experiencing a free fall
for the past four years, is showing signs of having bottomed out.
Consensus data indicate that Russia's real seasonally adjusted
industrial production has enjoyed relative stabilization in the ten
months leading up to June 1995. At the sectoral level, clear winners
and losers are emerging, but the overall picture suggests that the
continuing downturn in the textile, consumer goods, and state defense
sectors is more than balanced by output increases in the chemical, non-
ferrous metal, machine building, construction and other sectors.
By far the largest growth area in 1994 came in the
chemical/petrochemical and non-ferrous metals industries, each of which
have benefited from strong global demand and relative price advantage.
Soda ash output grew by nearly 19 percent, mineral fertilizer output by
16 percent, sulfuric acid output by 12 percent, and synthetic ammonia
output by 2 percent in the fourth quarter of 1994 over 1993. Among non-
ferrous metals, magnesium and magnesium alloys posted modest gains in
1994, and nickel skyrocketed - up 46 percent in the fourth quarter of
1994 over the same period in 1993.
Between the big winners and big losers are a group of industries that
show some tentative signs of strengthening. The timber and wood
processing industry was hit hard by the transition to a market economy,
registering an initial drop (from January 1990 to June 1994) of 70
percent - but is showing signs of limited recovery, with commercial pulp
posting a 10 percent increase in output in the fourth quarter of 1994
over fourth quarter 1993. (The timber industry as a whole still suffers
from the high transportation costs associated with bringing product from
forest to market.) While the food processing industry as a whole is
still in decline, vegetable oil production posted a slight increase in
the fourth quarter of 1994 over the same period of 1993, mostly due to
strong domestic demand. It is possible as well that growth in the food
processing industry is taking place in smaller privatized businesses
(local bakeries, etc.,) which are more difficult for the official
statistics agency to capture. Ferrous metal production is still in
decline overall, but losses in the domestic market have been nearly
balanced by strong world demand. This is noticeable in pig iron, which
posted a 1.6 percent gain in the fourth quarter 1994 output over fourth
quarter 1993, and rolled metal, output of which largely stabilized in
the latter half of 1994 relative to 1993. Likewise, the machine
building sector showed early signs of recovery in the second half of
1994, with tractor production up slightly in the fourth quarter of 1994
over the same period in 1993.
However, trends in the industrial sector tell only part of the story in
Russia. The retail/wholesale trade and service sectors, which together
made up more than half of GDP in 1994 are thriving. Small independent
trading establishments have emerged (usually in the form of kiosks) all
over Russia's major cities, selling a variety of domestically produced
and imported goods. Likewise, the service sector, long underdeveloped
under the Soviet system, is burgeoning, especially in the major
metropolitan areas. Along with the introduction of major western
accounting and legal firms to Russia's corporate make up are small
service providers, who with informal traders make up the bulk of the
cash or "gray" economy.
Government Role in the Economy
Privatization has made great strides in Russia. According to the
government, as a result of small-scale, voucher and post-voucher (cash)
privatization, over 110,000 enterprises have been privatized in whole or
in part. More than 80 percent of Russia's industrial workers are now
working in privatized firms. The start of the central government's
portion of the (cash) privatization program, under which the government
will sell many of its retained holdings in privatized firms as well as
the most of the enterprises which have not yet been privatized, has been
delayed repeatedly. However, this program has made substantial progress
in some of Russia's regions, including sale of the land on which they
are situated to privatized firms, a major innovation President Yeltsin
included in his July 1994 decree on cash privatization.
In addition, the Federal Bankruptcy Agency (FBA) has begun to implement
President Yeltsin's decision of May 1994 to declare insolvent state
firms bankrupt. The FBA completed the first reorganization and sale of
an insolvent state firm in November 1994. The FBA is processing perhaps
300 administrative actions against insolvent state firms as well as
having initiated another 300 actions in Russia's commercial courts.
Although it is too soon to judge how sweeping the FBA's actions against
the over 2,000 state firms it has found to be insolvent, this process is
clearly gaining momentum.
Roughly 85 percent of wholesale and retail prices were liberalized by
the end of 1992. Together with a virtually unrestricted import regime,
price liberalization ended shortages of consumer goods through much of
Russia. A few prices remain regulated by the government, among them
rail transport and housing. Energy prices remained controlled at the
wholesale level, with domestic prices substantially below international
levels.
Balance of Payments Situation
Russia's current account (after rescheduling) registered a surplus for
the second year in a row in 1994, though the level was much lower at USD
1.4 billion. The 1994 surplus reflected a USD 12.3 billion merchandise
trade surplus, offset by a USD 10.9 billion deficit in non-merchandise
trade. Total trade expanded by 9 percent over 1993 to USD 83.7 billion,
after contracting slightly in 1993 over 1992. Russia's non-merchandise
trade deficit increased sharply in 1994 over 1993, led by an increase in
the net services deficit to USD 6.8 billion. In 1994, Russia sustained
a capital account deficit in excess of USD 20 billion for the second
year in a row, including USD 14 billion in principal payments. Net
international reserves (NIR) of the Russian monetary authorities ended
the year down USD 1.8 billion at USD 4 billion, having peaked in the
second quarter at USD 8 billion and then fallen as the ruble came under
pressure in the third and fourth quarters. Gold reserves also fell by
USD 500 million to USD 2.6 billion by year end.
Capital flight continues to plague the Russian economy, although
official data suggest that the rate of capital flight has slowed
somewhat since its peak in 1992. Opinions vary greatly, but a realistic
assessment would place capital flight at close to USD 17 billion in
1994, and would note that little of this is related to criminal
activity, but represents a legitimate desire for safe havens abroad for
foreign exchange earnings.
The U.S. and Russia signed a $900 million bilateral debt rescheduling
agreement on October 25, 1994, formally putting into effect the Paris
Club rescheduling accord reached the previous June with Russia's
official creditors. In it, the Paris Club agreed to reschedule 7
billion dollars in official debt owed by Russia in 1994, thus easing its
repayment burden. In June 1995, the Paris Club reached agreement with
the Russian government to reschedule 6.3 billion dollars in Russian debt
payments due this year and to hold talks with Moscow on rescheduling
Russian debts inherited from the former Soviet Union. The London Club
of commercial bank creditors is expected to reach agreement with the
Russian government in mid-1995, and $500 million in payments have been
already put into trust.
Infrastructure Situation
Although Russia boasts of an extensive transportation infrastructure
built during the Communist era, its communications infrastructure leaves
much to be desired. During the Communist era, Russia invested heavily
in building transportation infrastructure: roads, railways, airports,
and ports. During later years, the government had difficulty
maintaining many of those facilities. In the breakup of the Soviet
Union, Russia lost a number of key ports, which has led to overcrowding
at the St. Petersburg port. Some western companies are finding it
easier to ship goods to Helsinki and then transport them into Russia by
truck. In addition, SeaLand Service operates a container service out of
the Far East port of Vostochniy to Moscow, with onward links to Western
Europe. Russian Far East ports (Vladivostok, Vostochniy, Nakhodka, and
others) now handle more than a third of all cargo and are particularly
important for imports/exports to Siberia and the Russian Far East.
III. POLITICAL ENVIRONMENT
Nature of Bilateral Relationship with the United States
With the end of the Cold War and the reemergence of a Russian State,
U.S. relations with Moscow have evolved rapidly over the last two and a
half years. At meetings in Vancouver, Tokyo and Moscow, Presidents
Clinton and Yeltsin laid the basis for a U.S.-Russian partnership. Over
the last two and a half years we have made great strides forward in a
number of important fields -- particularly arms control. While
disagreements persist on individual issues, the U.S. and Russia now
consult closely on major issues of mutual and international interest.
The United States firmly supports Russia's development into a
democratic/market society, and Russia's further integration into the
international community. The United States has made available
substantial bilateral assistance -- and has led international aid
efforts. The United States has also taken steps to clear from the books
Cold War era legislation limiting contacts with Russia. On April 2,
COCOM ceased to exist, and we are currently working with our partners to
form a new international export regime which will not be directed
against Russia.
Major Political Issues Affecting Business Climate
One of the most pressing issues which defines the business climate in
Russia is the lack of legislation in most areas of economic activity.
This is due primarily to the fact that there is no political consensus
in the State Duma and the Government on how business activities should
be regulated, whether private business should be promoted, and the role
of foreign investment in Russian society. Not only does this make
taxation and business regulation an unpredictable prospect at best,
there is no judicial basis for resolution of disputes between
individuals and/or companies. In the absence of legislation, many
government decisions affecting business have been taken by executive
fiat -- diminishing the prospects for their legitimacy and
effectiveness, and often leading to inconsistent policy.
Even more telling of the business climate is the ever-increasing wave of
crime which has swept over Russia with the passing of Soviet control.
Police are underpaid, outnumbered and outgunned. Individual and
organized criminal elements flourish. Especially problematic is
racketeering, which raises costs for local and foreign businesses alike.
Protectionist elements in the Federal Assembly have raised the
possibility of retaining certain elements of Soviet policy towards
foreign investors. This might take the form of limits on foreign share
holdings, limitations on property ownership, or an increased tax burden
on foreign businesses. This pressure for greater protectionism reflects
the widespread perception that foreign business is taking advantage of
the current unstable situation to make quick money, and these proposals
could make foreign investors wary of further involvement.
Brief Synopsis of Political System, Schedule for Elections, and
Orientation of Major Political Parties
As outlined in the new constitution adopted in December 1993, the
Russian Federation is governed by a political system modeled after many
in the West. The federal system is composed of three branches:
executive, legislative and judicial. The Federation is composed of 89
"subjects," which include regions, ethnically-based autonomous
republics, territories and the cities of Moscow and St. Petersburg.
These "subjects" are granted some autonomy over internal economic and
political issues, but there is considerable disagreement over how much
authority they are to share with Moscow.
Executive Branch: Under the constitution, the executive branch is led
by the President, who is elected for a five-year term. President
Yeltsin's term expires in 1996. He has the right to choose the Prime
Minister (currently Viktor Chernomyrdin), with the approval of the
legislature. The Prime Minister in turn appoints ministers, who are
responsible for the execution of legislation and decrees in their
respective fields.
Judicial Branch: The judicial branch comprises the Constitutional
Court, which reviews the constitutionality of federal legislation; the
Supreme Court, which is the highest civil and criminal judiciary body;
and the Supreme Arbitration Court which resolves economic disputes
between subjects of the Federation. The Constitutional Court held its
first session in the spring of 1995.
Legislative Branch: The legislative branch is composed of a two-chamber
federal assembly, elected for the first time on December 12, 1993. The
Upper House, the Federation Council, consists of two representatives
from each subject of the Russian Federation. The Federation Council
passes decrees on federation disputes and reviews legislation passed by
the Lower House, including the federal budget. The Lower House, or
State Duma, is made up of 450 deputies, one-half selected on the basis
of geographic districts and one-half on the basis of party lists. The
Duma passes most federal laws. Duma members are elected to four-year
terms (after an initial two-year term which began in 1994). The next
legislative elections are scheduled for December 1995.
Political Parties: There are over twenty parties and fractions
represented in the Parliament. Pro-reform forces in the Federal
Assembly are represented most notably by Yegor Gaydar's "Russia's
Choice," generally considered the strongest advocate of market reform.
Grigoriy Yavlinskiy's "Yabloko" party also supports free markets, but is
more inclined to use government funds to ensure a strong social safety
net. Sergey Shakhray's "Party of Russian Unity and Concord" is quite
progressive but more reserved in its support of radical economic reform,
supporting a greater role for the local regions as well as a mixed
economy. "Centrist" groups pushing for a slower approach to reform
include the "New Regional Policy," a loose grouping of centrist
politicians; "Women of Russia;" and "The Liberal Democratic December 12
Union," as well as many independent deputies. There is also a wide
range of parties standing firmly in opposition to market reforms. The
"Russian Liberal Democratic Party" is a radical right-wing nationalist
party led by Vladimir Zhirinovskiy. Lapshin's "Agrarian Party"
represents Russia's agricultural establishment and favors continued
government support for the agricultural sector. The reconstituted
Communist Party is headed by Gennadiy Zyuganov. The anti-government
parties hold a majority on most issues. In the spring of 1995,
President Yeltsin established two "centrist" movements which he hopes
will be a broad-based coalition behind his policies. The "Russia is Our
Home" movement led by Prime Minister Chernomyrdin comprises center-right
political leaders and factions, leading commercial structures, and many
regional governors. The center-left movement led by Duma Speaker Ivan
Rybkin includes leading social democratic political leaders and
movements. Chernomyrdin's movement is far better organized and well-
financed than Rybkin's at this time.
IV. MARKETING U.S. PRODUCTS AND SERVICES
As Russia continues to make substantial progress toward becoming a
market economy, the process of selling goods and services in Russia is
becoming increasingly market-oriented. The stereotype of Russia as a
homogeneous seller's market dominated by state-owned stores and
unsophisticated customers is long gone. Factors such as finding the
proper sales channel and customer segment, coping with domestic and
import competition, responding to consumer preferences, and pricing
products to the market -- i.e. the same factors that U.S. companies deal
with at home and in "mature" export markets such as Canada and Western
Europe -- are rapidly coming to the fore. However, it must be noted
that the Russian market still displays unique characteristics that
require special approaches and methods by would-be foreign suppliers.
Distribution and Sales Channels
A key initial decision for a U.S. firm seeking to introduce its product
into the Russian market is the choice of a distribution/sales channel.
Increasingly, such channels in Russia are diversifying and becoming
product and customer-specific. The following illustrates possible
options for marketing and distributing U.S. goods and services in
Russia.
Direct sales to end-users is currently the most popular approach for
most U.S. suppliers of capital goods and industrial equipment. Russian
end-users of these types of products are predominately large state-owned
or recently privatized enterprises. Such enterprises are typically
located in and around major cities although many are in more remote,
sparsely populated areas throughout the country.
U.S. firms marketing products and services to large Russian enterprises
typically operate from a representative office located in a major
Russian city. The capital city of Moscow is by far the most popular
location for representative offices, although the number of U.S. firms
located in St. Petersburg and Vladivostok, for example, is growing. Due
to Russia's large size and the geographic dispersion of buyers in this
sector, frequent air travel by sales representatives to visit
prospective buyers is a necessity.
It is important to emphasize that while U.S. suppliers of capital goods
and industrial equipment can and do use Moscow as a base of operations,
the great majority of sales are negotiated and transacted "in the
field." The number of potential buyers in this sector that are located
in Moscow is very small compared to Russia's major industrial zones
(i.e. the Urals region, Siberia, the Northwest/St. Petersburg region and
the Far East). Moreover, Russian industrial enterprises are now largely
independent of central government control and usually do not have
permanent representatives in Moscow. Simply put, selling capital goods
and equipment in Russia without leaving Moscow is no longer a
possibility.
Some U.S. suppliers in this sector, especially small and medium-sized
firms seeking a cost-effective alternative to establishing a
representative office in Russia, utilize the services of intermediary
organizations such as commission agents, export management companies and
export trading companies. Such intermediaries, often possessing their
own in-country office and sales personnel, can perform a variety of
marketing services on behalf of U.S. equipment suppliers such as making
sales calls on prospective end-users, exhibiting the supplier's products
at trade exhibitions and negotiating sales contracts.
Use of Agents/Distributors; Finding a Partner
Although Russia still lags behind most western countries in terms of
well-developed distribution networks, U.S. suppliers of consumer goods
and services and smaller-ticket equipment items are increasingly able to
penetrate the Russian market through local distributors. The importance
of Russia's fledgling distribution networks is magnified by the ongoing
privatization of the Russian retail sector, which has resulted in a
rapid proliferation and diversification of retail outlets.
In a few product categories (i.e. apparel, packaged foods, alcoholic
beverages, office equipment and personal computers), foreign suppliers
can choose from a small but growing number of existing Russian
distributors. These Russian middlemen firms can help the foreign
supplier by placing its products on store shelves, handling customs and
transportation matters and even conducting advertising campaigns. Such
existing distributors can be contacted at trade exhibitions, through
trade publications and Commercial News USA, and through the Commerce
Department's Agent Distributor Search service. However, it should be
kept in mind that many of these recently-formed Russian distributors
have comparatively short track records in the distribution business, are
small-volume operations, and their experience is often limited to the
main cities of Moscow and St. Petersburg, or other regional centers.
Because of these limitations, many U.S. suppliers have chosen to market
their products in Russia through authorized distributorships which they
create from scratch. While obviously this approach entails greater
expense than utilizing existing distribution networks, it can provide
valuable protection for the U.S. supplier's product quality and
corporate image. It also allows the supplier to establish a
distribution network capable of handling larger product volumes, which
lowers per unit costs and increases market coverage. Moreover, it is
worth noting that this approach has proven especially popular among
foreign service providers in Russia (e.g. insurance, long distance and
cellular telephone services, etc.).
The first step in creating a Russian distribution network is often for
the U.S. supplier to establish a representative office in Russia from
which it can acquaint itself with the domestic market as well as build
and supervise its local distribution network. The second step is to
identify Russian firms capable of acting as distributors for an American
product. Many U.S. firms seek out Russian companies with experience in
manufacturing, handling or servicing Russian products similar to those
of the U.S. firm -- for example, a Russian assembler of personal
computers that is interested in distributing American-made PCs. Such
contacts can be made at trade exhibitions, by working through a Commerce
Department-supported Consortium of American Businesses in the Newly
Independent States (CABNIS) and through the Commerce Department's Agent
Distributor Service and Gold Key Service.
The final step involves the provision by the U.S. firm of considerable
hands-on training for its distributor, as well as supervision of the
distributor thereafter, to ensure that the Russian distributor upholds
the quality standards of the supplier and the product and that it
effectively reaches the market segment targeted by the supplier. Often,
U.S. firms provide such training by bringing new distributors to their
American headquarters for "internships" in marketing and corporate
culture. The Commerce Department's Special American Business Internship
Training Program (SABIT) can help U.S. firms defray the cost of
providing such internships for Russian business partners.
Franchised Dealerships and Direct Marketing
Foreign firms in certain sectors (i.e. automobiles, home electronics and
fast food) have achieved success in the Russian market by setting up
franchised dealerships with Russian partners. Similarly, a handful of
foreign firms have established wholly-owned retail outlets in Russia.
This latter approach is often used by foreign suppliers of luxury or
high-value-added consumer items (e.g. cosmetics, perfumes, fine china)
as an initial market entry tactic which will be abandoned as soon as
Russian retail establishments suitable to the supplier's product appear.
While franchising and direct retailing are comparatively expensive and
time-consuming undertakings (involving, for example, the difficult
process of locating, leasing and renovating retail space in a major
Russian city), they provide the U.S. supplier with the highest possible
control over the marketing of its goods and services in Russia.
Joint Ventures/Licensing
A small but growing number of foreign firms have entered into joint
venture arrangements in Russia for the manufacture and sale of finished
goods in the domestic market. To date, examples of products produced
and distributed successfully by U.S.-Russian joint ventures include soft
drinks, ice cream, cigarettes, computer hardware and software, and
elevators.
Firms supplying the Russian market through joint ventures seek to take
advantage of lower domestic factor costs, make use of the Russian
partner's knowledge of the domestic market, and circumvent high import
tariffs on finished goods. Uncertainty regarding Russia's legal climate
for foreign investment is a key factor preventing faster development of
joint ventures as a form of market entry by U.S. suppliers.
Additionally, U.S. firms often have difficulty finding viable Russian
partners for joint venture manufacturing because few Russian enterprises
are experienced in producing and distributing Western-standard products.
For this latter reason, joint venture projects undertaken in Russia are
frequently developed in a multi-phased manner. For example, the initial
phase of the project is often limited to the packaging of imported
finished goods on the premises of the Russian partner and subsequent
distribution of the product. After a period of successful operation in
this mode, the project then moves on to assembly and packaging of
imported components. With continued success, the project may progress
to the final stage of utilizing a large percentage of locally-sourced
raw materials in the production process.
At present, production of U.S. products in Russia under license is
relatively rare.
Steps to Establishing an Office
As mentioned above, foreign firms often conduct marketing activities in
Russia through representative offices. Under Russian law, foreign
representative offices are not considered to be Russian legal entities;
they can conduct marketing activities and sign contracts, but cannot
engage in taxable commercial activities.
Representative offices can be in two forms: accredited or non-
accredited. Accreditation is the more time-consuming and expensive
approach, and it requires the foreign firm to have a Russian Government
sponsoring organization (usually the Ministry of Foreign Economic
Relations or an industry-specific ministry). However, accreditation
holds certain advantages in that the accrediting sponsor can issue
invitations to foreign personnel visiting the representative office
(which are necessary to obtain Russian business visas) and can assist
the office in making business contacts.
Because accreditation involves the submission of various legal and
financial documents to the Russian Government sponsor, most foreign
firms seeking accreditation in Russia retain a local attorney to handle
the application for them.
Both accredited and non-accredited offices must file a registration form
with the Russian Tax Inspectorate within one month of establishment of
the office.
Selling Factors/Techniques
Two related keys to success in supplying the Russian market are (1)
focusing on buyers with regular export earnings or good cash flow and
(2) not overlooking non-traditional customers.
U.S. suppliers of many types of products, including capital goods and
industrial equipment, achieve success by targeting Russian enterprises
that export a significant portion of their production for hard currency
or generate good cash flow as a result of domestic sales. A slightly
different but equally successful version of this approach is to target
regional Russian government authorities located in natural resource-rich
areas of the country, as these authorities often receive a share of the
export revenues generated by enterprises under their jurisdiction.
For example, U.S. firms frequently report successful sales of small to
medium-sized lots of personal computers, office equipment and consumer
goods (e.g. home appliances and white goods, sporting goods,
automobiles, furniture) to regional and local government administrations
or large Russian enterprises located in oil-producing Western Siberia
and Tatarstan and diamond-rich Yakutia. These agencies use these
products for a variety of purposes, including outfitting their own
offices, supplying population centers in remote areas of the country and
even distributing them to their employees as incentive awards.
Savvy U.S. firms also watch for announcements of major modernization or
expansion projects by Russian enterprises. Often, the Russian
Government helps the affected enterprise pay for the necessary equipment
imports by providing a special allotment of financing, by temporarily
waiving tariffs and quotas on the enterprise's exports, or by
temporarily exempting the enterprise from the legal requirement to
resell a portion of its hard currency export proceeds to the Russian
Central Bank.
Finally, development projects in Russia financed by the World Bank, the
European Bank for Reconstruction and Development and the U.S. Agency for
International Development frequently involve competitive tenders for the
procurement of imported goods and services.
U.S. firms also successfully sell for rubles. Some denominate their
sales contracts in dollars, but accept rubles as payment. The rubles
are then converted on the Moscow Interbank Currency Exchange or some
other currency exchange in Russia by the seller's bank, or through
interbank mechanisms, and then wired to the seller's offshore bank.
Because of the delay between contract signing and receipt of dollar
payment offshore, there is usually a slight difference between the
contract price and the payment received. The purchaser is notified of
the difference, the same bank transfer process occurs, or the seller
accepts the small amount of rubles for local costs and then the product
is shipped.
Advertising and Trade Promotion
As the Russian market grows more competitive and sophisticated, more and
more foreign firms are undertaking domestic advertising as an integral
component of their marketing strategy. Advertising through television,
radio, print and billboard media has become especially characteristic of
the consumer goods and financial services markets. As one would expect,
the number of western as well as Russian advertising agencies active in
Russia is growing rapidly.
At present, the legal/regulatory environment for advertising in Russia
is not well developed. The Russian parliament dissolved by President
Yeltsin in October 1993 had passed a law banning all tobacco and alcohol
advertising, but this law has never been enforced. Russia's first
comprehensive advertising law is now being formulated by the new Russian
Parliament's information committee, but relatively little has been
publicized about the content of this draft law or the timetable for its
completion. In response to several highly-publicized scandals involving
Russian investment firms which embezzled money from investors through
advertisements promising huge and quick returns, President Yeltsin
signed in June 1994 a decree calling for stricter standards of "truth in
advertising." However, an assessment of this decree's impact on the
local advertising market will be possible only after the publication of
implementing regulations.
Both foreign and domestic firms frequently advertise in commercially-
oriented newspapers and journals in Russia, with the following being the
most popular:
Deloviye Lyudi (monthly journal, Russian language)
Izvestiya (daily paper, Russian language)
Kommersant (daily paper, Russian language)
Delovoy Mir (daily paper, Russian language)
Ekonomika i Zhizn (weekly paper, Russian language)
Business MN (weekly paper, Russian language)
Moscow Times (daily paper, English language)
Moscow Tribune (daily paper, English language)
Moscow Business Guide (monthly business directory,
English language)
Delovoi Petersburg (daily paper, Russian language)
St. Petersburg Press (daily, English language)
Trade exhibitions in Russia are a useful mechanism for U.S. suppliers to
expand awareness of their product and meet potential buyers and
distributors. Moreover, U.S. consumer goods suppliers frequently make
substantial off-the-floor sales at Russian trade exhibitions. This
appears to result from the fact that representatives of regional
governments and state enterprises from remote, poorly-supplied areas of
Russia often visit trade exhibitions in major cities in order to
purchase stocks of consumer goods for their region or enterprises.
Pricing Product
It is difficult to generalize about the pricing of U.S. goods and
services in the Russian market. On the one hand, Russia's per capita
income is lower than most western countries which would argue for
pricing imported products toward the low end of the spectrum. This is
especially true for U.S. suppliers that seek to market their products to
a broad spectrum of Russian society (e.g. candy, disposable shavers,
cigarettes).
On the other hand, downward pricing may not be appropriate for products
(i.e. luxury automobiles) that target the fast-growing segment of
Russian consumers who, due to their involvement in private business and
entrepreneurial activities, possess significant discretionary incomes.
In some cases, the relative lack of competition in the Russian market
for certain products allows foreign suppliers to introduce new products
at higher-end prices. Moreover, Russia's relatively high import tariffs
and 23 percent value-added-tax (VAT) put upward pressure on the prices
of many imported goods. At any rate, it is worth noting that with
almost all prices in Russia now decontrolled and with inflation running
at 7-8 percent per month, Russian consumers have grown somewhat
accustomed, at least psychologically, to higher prices.
When developing their pricing strategies, U.S. suppliers should also
take note of the considerable regional segmentation of the Russian
market. While the market for a particular imported product in Moscow or
St. Petersburg may be characterized by the availability of several
competing import and domestic brands, heavy advertising, good consumer
awareness and widespread price competition, the market for the same
product in major regional cities such as Yekaterinburg or Novosibirsk
may be completely different.
Selling to the Government
Despite the nearly complete disintegration of the former Soviet Union's
centralized trading regime, Russian Government organizations (including
central, regional and local authorities) are still potential customers
for U.S. suppliers in certain instances. For example, the Russian
Ministry of Health and the country's more than 100 regional government
administrations frequently make direct purchases of pharmaceuticals and
medical equipment which they in turn distribute to hospitals, clinics
and institutes under their jurisdiction. Also, Russian Government
ministries (or ministry-designated trading organizations) often act as
purchasing agents for goods and services procured under official tenders
financed by international development agencies (e.g. the World Bank, the
European Bank for Reconstruction and Development). However since local
governments in general no longer receive substantial subsidies from the
federal government they make purchasing decisions based on local factors
and contacts. Once again to take advantage of opportunities at the
local and regional level companies must venture beyond Moscow.
Protecting Your Product from IPR Infringement
Russia has made progress in establishing the legal basis for protection
of intellectual property rights. Laws protecting patents, trademarks,
integrated circuits and computer databases in Russia were adopted in
late 1992, and a copyright law came into force in 1993. Russia also
subscribes to major international conventions and agreements on
intellectual property.
However, Russia's implementation and enforcement of laws protecting
intellectual property have not kept pace with legislative developments.
Piracy in computer software, motion pictures, videos, recorded music and
proprietary-label clothing is pervasive, and foreign firms have
experienced significant problems with patent infringement as well.
Moreover, U.S. attorneys operating in Russia report that adjudication of
IPR disputes in Russian courts is difficult due to the latter's lack of
experience with these issues.
Need for a Local Attorney
Russia has yet to develop a codified commercial or tax code. As a
result, the great majority of commercial regulations are contained in
thousands of individual presidential, governmental and ministerial
decrees. Often the relationship between these decrees and existing laws
is overlapping, conflicting or unclear.
While one of the key tasks before the newly-elected Russian Parliament
and the Government of President Yeltsin is to develop a modern, codified
body of business law, this will not be accomplished overnight.
Therefore, for the foreseeable future U.S. firms operating in Russia
should use the services of a local attorney for most legal transactions.
The Consular section of the Embassy maintains and will make available
upon request a list of local attorneys.
V. LEADING SECTORS FOR U.S. EXPORTS AND INVESTMENT
Best Prospects for Non-Agricultural Goods and Services
(figures are US$ millions, unless otherwise noted)
1. General Consumer Goods (GCG)
Russia has become a fabulous market for U.S. consumer goods. Russian
consumers, accustomed to Soviet era shoddy goods and shortages, have had
a long pent-up demand for Western luxuries. As Western consumer goods
reached Moscow and St. Petersburg markets, well-to-do and middle class
Russian consumers responded with non-stop purchasing. Now, U.S.
consumer goods companies can turn to supplying the 150 million plus
Russian consumers outside Russia's two leading cities, Moscow and St.
Petersburg, who are still unable to purchase most Western consumer
goods. Best prospects include cosmetics, perfumes, cleaning products,
videotapes, books, pet supplies, and others.
Data Table
1994 1995 1996
A. Total Market Size 2000 3000 4000
B. Total Local Production 1200 1000 800
C. Total Exports 50 50 50
D. Total Imports 850 2050 3250
E. Total Imports from U.S. 30 34 100
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
2. Building Products (BLD)
Though the quality of Russian produced building products is
substantially lower than Western products, their price is just as high.
As a result, Russian firms generally prefer to buy Western products.
Building products are sold through wholesale and retail shops. European
suppliers are developing an increasing share of this market. Demand is
especially high in major industrial cities, where many offices, shops,
and hotels are being refurbished and built. The most promising
subsectors are building materials and products for interior finishing.
Data Table
1994 1995 1996
A. Total Market Size 620 600 650
B. Total Local Production 445 400 400
C. Total Exports 81 80 100
D. Total Imports 256 280 350
E. Total Imports from U.S. 27 24 104
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
3. Computers and Peripherals (CPT)
The computer market is one of the most dynamic in Russia. While other
industries are slowing down, computer production and trade continue to
gain momentum. Buyers are moving from mediocre computers produced in
Hong Kong, Taiwan, Singapore, and Russia to high quality computers and
peripherals from the U.S., Europe, and Japan. The March 1994 lifting of
COCOM restrictions on importing technology into Russia has greatly
expanded U.S. export potential in this market. While the demand for
286-based machines is lower, 386 and even 486 machines are winning the
market. Hundreds of computer trading companies have been established
recently, and most want to distribute U.S. products. The most promising
subsectors are 386 machines, local area network equipment, laser
printers, and scanners.
Data Table
1994 1995 1996
A. Total Market Size 1158 1140 1160
B. Total Local Production 821 800 800
C. Total Exports 3 10 10
D. Total Imports 340 350 370
E. Total Imports from U.S. 114 130 205
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
4. Telecommunications Equipment (TEL)
The present Russian telecommunications system has little capacity, low
penetration and call completion rates, and lack of modern communications
services. It has weak and erratic local, inter-city, and international
connections. Telecommunications is one of the most rapidly developing
sectors in Russia. Currently, Russia is developing several
telecommunications projects: international fiber optic and microwave
networks, nation-wide long distance networks, and mobile (cellular or
paging) networks. Most promising subsectors include: fiber optic cable,
switching equipment, telecommunications software, cellular phones.
Data Table
1994 1995 1996
A. Total Market Size 901 940 1040
B. Total Local Production 301 300 300
C. Total Exports 9 10 10
D. Total Imports 609 650 750
E. Total Imports from U.S. 55 88 158
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
5. Aircraft and Parts (AIR)
Russia's airline fleet is faced with massive obsolescence. More than
1,000 aircraft (four-fifths for domestic, the rest for international)
must be replaced by the end of the decade, and many older planes require
replacement parts and extensive maintenance. Russian aviation companies
seek U.S.-made jet engines and avionics to produce low-cost aircraft for
domestic markets. Dozens of independent regional and private airlines
seek to lease new or used U.S. aircraft in order to fly both
international and domestic routes. Russia's new rich, and its new
private companies, are beginning to U.S. light aircraft for recreation
and business transport. Most promising subsectors are large passenger
aircraft, light aircraft, and jet engines.
Data Table
1994 1995 1996
A. Total Market Size 960 805 660
B. Total Local Production 715 650 600
C. Total Exports 100 100 100
D. Total Imports 345 85 160
E. Total Imports from U.S. 343 80 150
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
6. Food Processing and Packaging (FPP)
Consumer demand for high quality, attractively packaged foodstuffs will
make this sector one of the top prospects for the next several years.
Major U.S. food companies (Pepsico, Coca-Cola, Baskin-Robbins, and
others) are investing heavily in Russia, and will require U.S. equipment
to establish new production sites. Also, the Russian government's
International Agroindustrial Fund and an OPIC food processing investment
fund will help Russian food processors to modernize with Western
equipment. Most promising subsectors are baby food making machinery,
ready-to-eat food production lines, soft drink and beer production
machinery, and dairy products packaging equipment.
Data Table
1994 1995 1996
A. Total Market 490 690 890
B. Total Local Production 422 400 400
C. Total Exports 5 10 10
D. Total Imports 288 300 500
E. Total Imports from U.S. 11 10 80
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
7. Forestry and Woodworking Machinery (FOR)
Timber is one of Russia's top potential exports, and the Russian
woodworking industry needs Western-made equipment to improve production
efficiency. This year, the Russian government plans to sell shares in
50 top timber holding companies to raise money for modernization. An
expected U.S. Export-Import Bank framework agreement on forestry and
wood processing will provide financial support for this modernization
effort. Last December, the Russian government established a U.S.
subsidiary, the Russian Timber Investment Corporation, to encourage U.S.
companies to invest in the Russian timber industry. Best prospects
include machinery to make both narrow and wide boards, conveyer belts,
and papermaking machinery.
Data Table
1994 1995 1996
A. Total Market Size 500 600 800
B. Total Local Production 400 350 300
C. Total Exports 20 20 20
D. Total Imports 120 270 520
E. Total Imports from U.S. 8 4 64
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
8. Information Services (INF)
Russian government agencies, financing organizations and banks, Western
companies with offices in Russia, and increasing numbers of private
Russian firms seek integrated information systems for their operations.
The Russian government holds numerous tenders to supply hardware,
software, and services to government agencies. Increasingly regional
authorities are also now installing information systems. Most often,
these organizations seek a reliable Western or Russian information
services firm/systems integrator to design and install an integrated
information system. The 1994 removal of COCOM restrictions on the
import of advanced computers into Russia has accelerated the growth of
this market. Most major U.S. computer companies are now active in the
Russian market. USAID, World Bank, and U.S. Export-Import Bank
financing supports many of these purchases. Best subsectors include
general management information consulting and systems integration.
Data Table
1994 1995 1996
A. Total Market Size 500 600 700
B. Total Local Production 200 400 500
C. Total Exports 10 30 60
D. Total Imports 310 230 260
E. Total Imports from U.S. 30 40 90
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
9. Business Equipment (BUS)
As new Russian firms and government agencies modernize their offices,
U.S. producers can expect continued demand for Western business
equipment. U.S. producers will face strong challenges from Japanese,
Taiwanese, and Korean producers, and weak competition from domestic
suppliers. Aggressive U.S. marketing, especially in major cities
outside Moscow, will lead to strong growth in sale. Best subsectors
include facsimile, copying, and answering machines.
Data Table
1994 1995 1996
A. Total Market Size 540 599 649
B. Total Local Production 300 300 300
C. Total Exports 1 1 1
D. Total Imports 241 300 350
E. Total Imports from U.S. 21 16 66
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
10. Architectural/Construction/Engineering Services (ACE)
Russia is a good market for U.S. construction and engineering services.
In Russia's major cities, old buildings are being renovated, and new
ones built. Outside Russia's major cities, the newly rich and even the
not-so-rich are building or renovating dachas. Many of Russia's large
factories are seeking foreign engineering firms to help them modernize.
For example, Hunter Engineering is close to a $185 million deal to
renovate one of Russia's largest aluminum plants. U.S. firms will need
to be aggressive to gain market share, since Turkish and other European
construction firms are also active in the market. The most promising
subsectors are civil design/architectural services, non-industrial
development services, and hotel/commercial construction and renovation.
Data Table
1994 1995 1996
A. Total Market Size 700 1100 1100
B. Total Local Production 410 710 710
C. Total Exports 10 10 10
D. Total Imports 300 400 400
E. Total Imports from U.S. 50 200 250
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
11. Apparel (APP)
Russian clothing production has plummeted in the last three years. By
the end of 1994, net output of apparel and knitwear was 40% of what it
was in 1991. Russian-made apparel retains its generally poor quality
and unattractive design, while producers increasing prices sharply.
While production of expensive goods remained at the same level, the
output of cheap knitwear, clothes, and underwear declined markedly. Up
to 80% of the population prefer foreign-made apparel. While inexpensive
Chinese, Turkish, and Korean products have much market share, better
quality European and American women's clothing is in demand. Most
promising subsectors are pants and jeans, jackets and suits, shirts,
coats, and skirts and dresses.
Data Table
1994 1995 1996
A. Total Market Size 780 850 950
B. Total Local Production 840 640 640
C. Total Exports 151 150 150
D. Total Imports 91 360 460
E. Total Imports from U.S. 27 12 52
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
12. Oil and Gas Field Machinery (OGM)
Oil and gas field machinery and services remains a promising sector in
Russia. The U.S. Export-Import Bank Oil and Gas Framework Agreement,
World Bank, and European Bank for Reconstruction and Development (EBRD)
loans have greatly improved the market potential. U.S. firms are active
in several large projects to develop oil and gas reserves in Timan
Pechora, Western Siberia, and Sakhalin Island. Gazprom plans
significant pipeline construction and renovation. These projects,
involving billions of dollars invested by Texaco, Exxon, Amoco, Conoco,
Marathon, and others, will require large procurements for oil and gas
field machinery and services. Promising subsectors include
hydrofracturing equipment, pumps, and design and construction management
services.
Data Table
1994 1995 1996
A. Total Market Size 646 650 660
B. Total Local Production 452 450 450
C. Total Exports 17 20 20
D. Total Imports 211 220 230
E. Total Imports from U.S. 131 98 128
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
13. Medical Equipment (MED)
Like other sectors in the economy, the medical equipment sector is
changing. The Russian government is moving from purchasing foreign
medical equipment to buying it from Russian manufacturers. Government
purchases of foreign equipment were usually linked to foreign loans,
foreign credit lines, and international development projects. The
Russian government is now more willing to buy industrial equipment to
manufacture medical equipment and pharmaceuticals. At the same time,
regional health officials and private hospitals are becoming medical
equipment buyers. Also, large industrial enterprises and associations
have become active buyers of medical equipment for their own hospitals,
clinics and medical units. The most promising subsectors are radiology
equipment, diagnostic equipment, dental equipment, and laboratory
equipment.
Data Table
1994 1995 1996
A. Total Market Size 920 960 1010
B. Total Local Production 75 70 70
C. Total Exports 7 10 10
D. Total Imports 852 900 950
E. Total Imports from U.S. 61 64 89
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
14. Electric Power Systems (ELP)
The Russian electric power sector is in disarray. Output of electricity
has been falling since 1991. In 1994, output was 8 percent lower than
in 1993. As a result, more and more demand for power is unsatisfied.
The industry requires equipment, technical assistance, and investment to
modernize its production facilities. More than one third of Russian
power plant capacity is badly outdated. Many foreign firms -- including
General Electric, Babcock and Wilcox, and others -- are involved in
joint ventures and projects with Russian power equipment and power
transmission companies. Best subsectors are gas turbines, steam
turbines, and boilers.
Data Table
1994 1995 1996
A. Total Market Size 117 130 140
B. Total Local Production 100 100 100
C. Total Exports 74 70 70
D. Total Imports 91 100 110
E. Total Imports from U.S. 10 13 28
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
15. Pollution Control Equipment (POL)
Most older Russian industrial enterprises lack adequate pollution
control equipment. Lack of money still prevents Russian enterprises
from purchasing necessary pollution control equipment on a major scale.
A good approach to the market is for U.S. producers to participate in
major Russian industrial modernization projects with secured financing.
Russian end-users have little experience or familiarity with state-of-
the-art Western pollution control equipment, yet should be receptive to
U.S.-made equipment. Most promising subsectors are gas, water and air
emission control equipment and filters, emission control equipment, and
water sanitation and treatment equipment.
Data Table
1994 1995 1996
A. Total Market Size 75 85 995
B. Total Local Production 75 75 75
C. Total Exports 50 50 50
D. Total Imports 50 60 70
E. Total Imports from U.S. 8 10 15
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
Note: Data on 1994 exports and imports come from the Russian
government, and should be considered relatively reliable. Definitions
of products and data gathering techniques may differ slightly. In
general, because of data collection problems, Russian estimates of
imports and exports will underestimate actual figures. Data on imports
from the United States come from the U.S. Department of Commerce, and
are considered to be reliable. We have also checked this data against
Russian data, and find basic confirmation. We were unable to secure
reliable data about total market size or total local production.
Best Agricultural Prospects
Note: Data for agriculture "best prospects", especially PS&D data, are
scarce. For some of the best products, value data have been used. U.S.
agricultural export data for CY1994 come from USDOC's Bureau of Census.
Russian data sources (i.e., the Russian State Statistical Committee and
the Russian Customs Committee) are unreliable, and underestimate actual
trade flows.
RED MEATS, FRESH/CHILLED/FROZEN
(Data in 1,000 metric tons except for imports from U.S.)
1994 1995 1996
Total Market Size - 5980 5880 5700
Total Production - 5510 5370 5250
Total Exports - 0 0 0
Total Imports - 470 510 450
Imports from the U.S. - 30.9 32 28
(USD$1 million)
The above statistics, except for 1994 imports from U.S., are unofficial
estimates.
Red meat exports to the Russian Federation have been stimulated by the
continuing decline in livestock inventories and stagnation in processed
meat production. U.S. meat products are especially competitive given
their price and quality. Niches exist for meat products which run the
gamut from variety meats to prime, USDA portion-controlled cuts.
Recently announced duty changes (the import duties on red meat are
reportedly scheduled to increase from 8 to 15 percent on July 1, 1995),
and the rescission of value-added tax (VAT) exemptions on imported foods
(as of April 1995, the VAT amounts to 10 percent of landed value plus
import duty) will make meat products more costly to Russians, and weaken
demand. Nonetheless, because of the decline in the domestic industry,
Russians will need to continue to source meat from overseas, and U.S.
meats enjoy an excellent reputation. Competition for the Russian market
comes chiefly from the European Union.
U.S. exporters should note that all raw pork shipped to Russia must go
immediately into processing. Additionally, all U.S. exporters should
ensure that they secure all necessary documentation demanded by the
Russian Government, especially the bilingual veterinary protocol.
POULTRY
(All data in 1,000 metric tons except imports from the U.S.)
1994 1995 1996
Total Market Size 1595 1590 1550
Total Production 1235 1215 1200
Total Imports 360 375 350
Total Exports 0 0 0
Imports from the U.S. 310 280 270
(USD$1 million)
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
U.S. poultry exports boomed in 1994, turning the Russian Federation into
the number one export market for U.S. poultry. Russians expressed
special preference for U.S. chicken leg quarters, which were
competitively priced. Market niches exist for other products such as
chicken breasts, turkey, and processed poultry products. The Russian
poultry industry continues to decline, and thus far, poultry has been a
relatively cheap source of protein. Recently announced duty increases
(from 20 to 25 percent, reportedly to take effect on July 1) and the
rescission of VAT exemptions (10 percent of landed value and import duty
as of April 1995) will reduce consumption. Competition is principally
from the European Union.
APPLES
(Data are in 1,000 metric tons)
1994 1995 1996
Total Market Size - 1864 1580 1530
Total Production - 1544 1230 1200
Total Exports - 0 0 0
Total Imports - 320 350 330
Imports from the U.S
(Data unavailable)
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
Given the inadequacies of the distribution system in Russian and the
generally poor quality of Russian apples, Russia will continue to be
obliged to import a significant quantity of apples. Opportunities for
U.S. exporters exist in major cities of European Russia (e.g., Moscow,
St. Petersburg, Nizhniy Novgorod), Eastern Siberia, and the Russian Far
East (RFE). Washington State apples are already making some headway in
the RFE, although New Zealand is also vying for this market. New duties
for apples have not been announced yet. The old duty structure is .2
ECU per kilo except for the period of January 1-July 31, when apples can
be imported into Russia duty-free. A VAT of 10 percent on customs value
and import duties is currently in effect.
TREE NUTS
1994 1995 1996
Total Market Size (no data)
Total Production (no data)
Total Exports (no data)
Total Imports (no data)
Imports from the U.S. 4.39 4.6 4.9
(USD$1 million)
The above statistics, except for 1994 imports from the U.S., are
unofficial estimates.
U.S. tree nut exports to the Russian Federation have been growing
rapidly since 1993. The new import duty for tree nuts has not been
announced (the current duty is 20 percent). A VAT of 10 percent of
customs value and import duties is currently in effect. Markets exist
for tree nuts as inputs (for confectionery and baked goods) and for
direct consumption. Competition comes mainly from the European Union.
VI. TRADE REGULATIONS AND STANDARDS
Trade Barriers
Introduction of new import tariff schedules is, apparently, becoming an
annual event in Russia. Along with this trend is the fact that import
tariffs are being raised. In July 1995, Russia introduced a new import
tariff schedule. The mean 1995 import tariff went up from 11.4% to
12.5%. Although a number of products received lower tariffs, higher
tariffs were imposed on imported goods in most demand, especially food
products. With these changes, the Russian government has raised the
minimum duty to 5%, except for a reduced number of duty-free goods, and
lowered the maximum duty to 30%, except for a few luxury goods.
Besides import tariffs, there are two other types of duties applied to
imported goods: excise tax and value-added-tax (VAT). Excise tax
applies to a number of luxury goods, such as alcohol, cigarettes, cars,
etc. It varies from 10% to 250%. The VAT rate of 23 percent (which is
in reality a 20 percent VAT plus a three percent "special tax" ) is
applied to the import price plus tariff plus excise tax.
Customs Valuation
Customs duties are payable on the customs value of goods in hard
currency or rubles at the current exchange rate. The customs value is
generally considered to be the CIF price of the goods imported. A
customs processing fee of 0.15% of the actual cost of the goods is also
levied. The fee for temporary imports is rubles 1,000. According to
customs regulations, customs processing should take not longer than one
month. If acceptance of goods is refused by Russian Customs,
regulations call for the goods to be returned to the country of origin.
Import Licenses
Import licenses are required for importation of various goods including
combat and sporting weapons, self-defense articles, explosives, military
and ciphering equipment, radioactive materials and waste including
uranium, strong poisons and narcotics, and precious metals, alloys and
stones. Most import licenses are issued by the Russian Ministry of
Foreign Economic Relations or its regional branches, and controlled by
the State Customs Committee. Import licenses for sporting weapons and
self-defense articles are issued by the Ministry of Internal Affairs.
Export Controls
Before 1995, exports of "strategically important raw materials" such as
oil and gas, non-ferrous metals, fertilizers, cellulose, grain, fish
products, rough diamonds and electric power required special export
licenses issued by the Russian Ministry of Foreign Economic Relations
(MINFER) to a limited number of exporters. A presidential decree,
number 245 (article 2) of March 6, 1995 lifted this restriction,
allowing the export of "strategically important raw materials" from
Russia without special permission of MINFER. The decree also abolished
the list of "special exporters." However, export of weapons, military
equipment and dual-use materials and technology continues to require an
export license. Exports of "strategically important raw materials"
still require registration with MINFER.
Import/Export Documentation
Importers are required to complete a customs freight declaration for
every item imported. The declaration form consists of 54 paragraphs and
should be completed in the Russian language for presentation to customs
authorities. Certificates of origin and conformity (see "Standards"
below) should also be presented at customs. Similarly, exporters are
required to complete an export declaration and, if necessary, present
the appropriate export license at customs.
Temporary Entry
Temporary imports by foreign companies which are accredited with Russian
government authorities are exempt from customs duties. This applies to
goods imported only for company use and for one year only. Companies
not accredited with Russian government authorities are charged 3 percent
of the total cost of the product on a monthly basis. In this case,
total cost equals original product price plus all import taxes.
Labeling, Marking Requirements
No special labeling or marking requirements are in effect.
Prohibited Imports
The customs code lists no products which are prohibited from import
under any circumstance.
Standards
Many products imported for sale into the Russian Federation are required
to have a certificate of conformity issued by the Russian State
Committee on Standards (Gosstandart). Gosstandart tests and certifies
products according to Russian Government standards, rather than other
widely-accepted international standards (i.e. the ISO-9000 system).
Gosstandart and its authorized agents are the sole sources for
certification in Russia.
Testing protocols from the IECEE (electrical equipment) and the IECQ
(electrical components), both of which fall under the International
Electrotechnical Commission, from Underwriters Laboratories, and other
bodies are accepted by Gosstandart and help to expedite certification by
the Russian agency. The certificate of conformity is valid for 3 years
and must accompany every shipment. Copies of the certificate are
acceptable if original seals of the U.S. company holding the original
certificate accompany the copy. Russian retailers are obliged to have
on hand certificates for all imported products sold in their stores;
violation of this requirement can bring penalties of up to the
equivalent $10,000.
Free Trade Zones/Warehouses
There are no actual free trade zones in Russia. There are some free
economic zones designed to encourage investments in specific areas, as
well as free customs zones and free warehouses. Customs duties do not
apply in free customs zones and free warehouses. Some production and
commercial transactions can take place within these zones, but not
retail sales. The storage period is not limited. Free customs zones
and free warehouses are located in customs areas (airports, seaports,
railway, and truck terminals).
Special Import Provisions
No special import provisions apply.
Membership in Free Trade Arrangements
Russia does not participate in any free trade arrangements. Russia has
an association agreement with the European Union, proposes to join the
GATT/WTO, and benefits currently from GSP and MFN status in the United
States.
VII. INVESTMENT CLIMATE
Openness to Foreign Investment
While the policy of the Russian government is to encourage foreign
investment, it has had difficulties in creating a stable and attractive
investment climate. Economic and political uncertainty serve as
disincentives to companies looking for investment opportunities.
Although there are no significant legal barriers to doing business in
Russia, the absence of sufficiently developed civil, commercial and
criminal codes is a major constraint. In addition, a confusing tax
system, and a rise in violent "mafia" instigated crime have become a
problem for foreign (and Russian) business. Bureaucratic requirements
can be confusing and burdensome to investors and bureaucratic discretion
may be capricious in awarding tenders or development rights to
companies. Ownership of real property is still being legislated, and
violations of intellectual property are serious and on the rise. A
deteriorated infrastructure adds to the difficulties of doing business -
- telephones, roads and transport are all of poor quality. Corruption
in commercial transactions has become a major issue in the last several
years.
Despite the problems detailed in this report, most U.S. companies in
Russia believe that opportunities justify the risks, uncertainties and
considerable bureaucratic obstacles. Few established foreign companies
are leaving and many continue to demonstrate an interest in Russia's
rich geological and human resources, world-class high-technology and
vast potential market.
Russia enacted an investment law in 1991 which defines the permissible
forms of foreign investments as well as the rights and obligations of
the government and investors. Also in force are laws on enterprises, on
joint stock companies and on the privatization of national assets, as
well as various presidential decrees. In 1994 the government was
preparing for review by the legislature draft laws on concessions, free
enterprise zones, production sharing (for oil exploitation) and a
revision of the 1991 investment code.
The 1991 Investment Code defines foreign investors as foreign legal
entities, citizens, states or international bodies. Foreign investments
may be made in all kinds of property (including intellectual), or placed
in entrepreneurial projects and other activities to derive profit.
Investments may be in the form of wholly-owned companies, joint
ventures, portfolio investment or in (limited) rights to use land or
other natural resources.
Russian foreign investment regulations regarding permissible activities,
prior authorization and notification requirements are confusing and
contradictory. The Ministry of Finance, local authorities and/or
various central government bodies all register foreign investments.
Prior approval is required for investment in new enterprises using
assets of existing Russian enterprises, foreign investment in defense
industries (which may be prohibited in some cases), investment in the
exploitation of natural resources, all investments over 50 million
rubles, investment ventures in which the foreign share exceeds 50
percent, or investment to take over incomplete housing and construction
projects. Additional registration requirements exist for investments
exceeding 100 million rubles. Projects of foreign enterprises may also
be subject to expert examination for ecological considerations or where
a large-scale construction or modernization is envisaged.
The 1991 Investment Code guarantees foreign investors rights not less
favorable than those of Russian investors.
The Russian post voucher (cash) privatization program adopted by
presidential decree in July of 1994 explicitly grants foreign investors
the right to participate in auctions and tenders and to purchase shares
in privatized firms, although the Ministry of Finance must be informed
of such action. Some restrictions do apply. For example, the federal
government can limit foreign access to enterprises in strategic sectors
such as defense, the energy sector, mining and minerals, transportation
and communications. However, the federal government plans to exempt
entirely a list of firms engaged in the sale or production of "strategic
commodities and products" from further privatization at least for the
remainder of 1995. Federal State Property Committee (GKI) Chairman
Belyayev has repeatedly stated that foreign investors will play a key
role in cash privatization and that they will be given national
treatment. Belyayev recently said that foreigners purchased 10 percent
of all shares offered during the first (voucher) phase of privatization
in Russia and that a higher level of foreign participation is desirable
in the cash phase. GKI reports that although Russian law does not yet
allow foreigners to own land, foreign investors can take majority
ownership in enterprises which own land. The first such example has
recently taken place in St. Petersburg. As to municipal and oblast
level enterprises, the local state property committees and
administrations have substantial autonomy and foreign investors will
need to work closely with such authorities.
Traditionally, all research and development in Russia was financed by
the government and occurred in government-owned or controlled institutes
and organizations. The entire system is now in a state of transition.
The government is providing considerably less funding for research that
in the past and individual institutions are actively soliciting
international participation in research projects (although some of the
projects in which American firms have begun active cooperation still
receive significant Russian government funding). The legal basis for
such cooperation is not yet firmly established, however, and the rights
and obligations of all private parties (foreign or Russian)
participating in government sponsored or subsidized research and
development are spelled out in the specific contract and agreements
reached by the parties involved.
Russian law offers few incentives to foreign investors. Those set out
in the 1991 investment law, including certain tax benefits, have never
been implemented, or have been largely eliminated or superseded by
subsequent laws and decrees.
Russia is well along in reforming its foreign trade regime in line with
market standards. Very few non-tariff elements remain. The country has
applied for accession to the World Trade Organization (WTO), has
submitted a memorandum of foreign trade regime, and is preparing for the
first meeting of its working group scheduled in 1995.
Russia has raised import tariffs in several stages beginning from zero
when the Soviet Union collapsed. In July 1994 import duties were raised
across the board, increasing the average weighted tariff to 11 percent
from 7-8 percent, with some duties reaching 50 percent. In March 1995,
by presidential decree, these rates were revised to raise the floor
(except for a reduced list of zero-duty goods) to five percent and lower
the ceiling (except for a few luxury goods) to 30 percent; this raised
the average weighted tariff further to 15-16 percent. A 1995
presidential decree provided for reducing or waiving import duties for
investment projects of USD 100 million or more of which at least USD 10
million is direct foreign investment.
Inherited Soviet-era qualitative restrictions on imports were initially
limited to security and health requirements, but Russia's July 1993
customer protection law stipulated official certification (by
GOSSTANDART) of imported products for conformity to Russian technical,
safety, health and quality standards. Requirements are still evolving,
and are based on a combination of international (mostly European Union)
and Russian standards. U.S. companies have complained of costly
procedures and arbitrary certification requirements. A joint Russian-
U.S. communique of December 1993 pledges cooperation on improving and
simplifying certification, testing and quality assurance. Russia is
establishing reciprocal standardization with the U.S. and with other
countries and is reciprocally accepting foreign certification by
accredited institutions. Import licenses are required on the normal
range of dangerous and harmful materials and goods.
The U.S. Government has imposed antidumping duties on Russian
ferrosilicon (June 1993), titanium sponge (August 1992), and urea (June
1992). Investigations are underway concerning alleged dumping of
Russian pure magnesium, ferrovanadium and nitrided vanadium.
Antidumping duties imposed on Russian uranium in 1992 were suspended in
1993 in exchange for a matched sales agreement.
Banking operations in Russia by foreigners, though improved, remain
problematic. A November 1993 presidential decree imposed a two-year
moratorium on foreign bank operations with Russian residents. This
decree conflicted with a September 1993 decree sheltering foreign
investors from adverse legal changes for three years and violated the
principle of nonretroactivity of law since it applied to foreign banks
licensed in October 1993. A June 1994 decree eased the November 1993
restrictions for existing European banks and an April 1995 decree lifted
the restrictions on the two existing American banks. A pending Duma
bill "On Banks and Banking Activity" contains a statute that extends
until January 1, 1996, a moratorium on foreign banks' dealing with
Russian residents, and introduces the policy of reciprocity for any
foreign bank seeking to obtain an operating license.
The banking bill also allows Russian authorities to set limits on the
total amount of foreign banking capital as a percentage of overall
banking capital. Currently, that limit stands at 12 percent, and the
capital of all operating foreign banks is considerably below this
figure. The Russian insurance industry is also lobbying for protection.
Increasingly, foreign insurance companies may follow the example of a
major American insurance firm, which entered the market via a 50/50
joint venture with a large Russian bank. Measures to limit foreign
attorneys not licensed in Russia from providing legal counsel on Russian
laws have had little effect on the foreign law firms, which continue to
rely largely on foreign lawyers.
Major changes have occurred in the oil and gas sector during the past 12
months. In October 1994, seven foreign joint ventures obtained oil
export tax exemptions for three years for the purpose of capital
recoupment. An additional seven joint ventures received exemptions in
February 1995 on similar terms, while another group of companies hopes
to have its request approved by the end of June 1995. The benefit to
the companies, however, may prove ephemeral, as the government has
announced that it will eliminate the export tax altogether by the end of
1995, replacing it with an excise tax on production to which exemptions
may not apply. In the meantime, the export tax has been reduced from 30
to 23 ecus, with another decrease to 20 ecus expected in June 1995.
In February 1995 President Yeltsin signed into law a bill amending the
1992 sub-surface resources law. The amendments make it easier to obtain
and transfer oil and gas production and exploration licenses, and
substitute more modest royalties for the 10 percent mineral replacement
tax. In June 1995, the Duma passed legislation which would allow
foreign oil companies to enter into production sharing contracts rather
than rely exclusively on existing joint venture provisions in the
foreign investment law; this legislation awaited the approval of the
Federation Council and the President at the time this report was
written.
Another important development was the elimination of oil export quotas
in January 1995. Producers are now allowed to export their oil without
prior approval from the Ministry of Foreign Relations. Nevertheless,
their ability to do so remains subject to their allocation of access
rights to the oil pipeline system by the Ministry of Fuel and Energy and
the state-owned pipeline company Transneft. Under current rules, this
means that roughly one-third of a company's production is given access
to pipelines serving hard currency export markets. Those established
joint ventures which qualified for oil export tax exemptions have been
given priority access to the pipeline system for the entirety of their
production.
Conversion and Transfer Policies
Russia has a unified exchange rate which floats, based on a daily Moscow
Interbank Currency Exchange auction where the Central Bank intervenes to
smooth fluctuations. In practice the Central Bank exerts considerable
influence on the rate as it collects and resells most of Russia's export
earnings.
The ruble is fully convertible within Russia and CIS countries which
remain in the ruble zone. There are currently no restrictions on profit
repatriation. In January 1994 commercial banks became responsible for
monitoring the repatriation of export earnings.
Foreign and domestic companies may acquire, hold and sell foreign
exchange freely, though hard currency cash transactions for goods and
services within Russia are prohibited. Russian enterprises are required
to convert 50 percent of foreign currency earnings into rubles by
selling such currency on either the currency market or to the Central
Bank of Russia.
Without special permission it is illegal for Russian companies or
citizens to maintain a bank account outside of Russia for purposes other
than operating expenses. Licenses are required for offshore accounts
and can be difficult to obtain. Non-residents can open individual and
commercial ruble accounts for servicing import/export operations
(referred to as "T-accounts") and for investment (referred to as "I-
accounts"). However, ruble balances in T-accounts many not be converted
back to U.S. dollars.
Expropriation and Compensation
The 1991 Investment Code prohibits the nationalization of foreign
investments except following legislative action and where deemed to be
in the national interest. Such nationalizations may be appealed to the
courts of the Russian federation, and are to be paid with prompt,
adequate and effective compensation.
While the domestic political situation remains ambiguous, the current
central leadership is unlikely to nationalize foreign investment or
engage in expropriation. However, local government interference in
several cases appears tantamount to expropriation; arbitration or legal
proceedings are pending in some of these cases.
Dispute Settlement
Russia has a body of conflicting, overlapping and rapidly changing laws,
decrees and regulations which has resulted in an ad hoc and
unpredictable approach to doing business. Independent dispute
resolution in Russia is difficult to obtain; the judicial system is
poorly developed. Regional and local courts are not accustomed to
adjudicating either commercial or international matters, and they (as
well as courts in Moscow) are often subject to political pressure.
Most western attorneys still refer their western clients who have
investment or trade disputes in Russia to international arbitration in
Stockholm or to courts abroad. However, a foreign arbitration award can
only be enforced in Russia if there is a reciprocal treaty between
Russia and the country where the order was made, or, if no such treaty
exists, if a Russian court reviews the procedures which led to the
granting of the award and agrees that it was properly made and can be
enforced.
It is therefore worth considering the alternatives available in Russia.
One choice is the Arbitration Court of the Russian Federation, which is
part of the court system. It has special procedures for seizure of
property before trial, so property cannot be disposed of before the
court has heard the claim, as well as for the enforcement of financial
awards through the banks. Additionally, the International Commercial
Arbitration Court at the Russian Chamber of Commerce and Industry will
hear claims if both parties agree to refer disputes there. Applications
can be made by parties to foreign trade agreements and by companies with
foreign investments.
The weakness in the system is the lack of differentiation in outcomes.
All awards and orders are enforced by the officials of the district
court whose procedures have not been modernized to take account of
changes in business. There is hope that a draft law on enforcement will
result in more effective litigation.
Russia is a member of the International Center for the Settlement of
Investment Disputes and accepts binding international arbitration.
Performance Requirements
Performance requirements are not imposed by Russian law, and are not
widely included as part of private contracts. However, they have
appeared in the agreements of large multinational companies investing in
natural resources.
Investors are not required to disclose proprietary information to the
Russian government as part of the regulatory process.
Right to Private Ownership and Establishment
Both foreign and domestic legal entities may establish, purchase and
dispose of businesses in Russia. Investment in those sectors, affecting
the national security (insurance, banking, natural resources) may be
limited.
Protection of Property Rights
The constitution and a presidential decree issued in 1993 give Russian
citizens general rights to own, inherit, lease, mortgage, and sell real
property; however, legislative gaps and ambiguities impede the general
exercise of these rights. Russia does not yet have a land code to
regulate land use and ownership. Thus far, Russian law and practice
appear to restrict or prohibit foreigners from owning real estate. The
presidential decree of 1993 gave joint ventures with foreign
participants the right to own real property, and a privatization decree
issued last summer permitted foreign owners of privatized companies to
receive title to enterprise land; however, such rights have not been
codified and legislation regulating land use currently being considered
by the Duma would likely prohibit foreigners from owning land. The
rights of Russian citizens to own and sell residential, recreational,
and garden plots is clearly established with over 40 million properties
of this type under private ownership. However, uncertainty about more
general rights to land title and mineral rights will persist until the
Duma adopts clear and comprehensive legislation to regulate land use and
ownership.
In 1992-93 Russia enacted laws strengthening the protection of patents,
trademarks and appellations of origins, and copyright of semiconductors,
computer programs, literary, artistic and scientific works, and
audio/visual recordings.
The Patent Law, which accords with the norms of the World Intellectual
Property Organization, includes a grace period, procedures for deferred
examination, protection for chemical and pharmaceutical products, and
national treatment for foreign patent holders. Inventions are protected
for 20 years, industrial designs for 10 years, and utility models for
five years. One must wait four years before applying for a compulsory
license. The Law on Trademarks and Appellation of Origins introduces
for the first time in Russia protection of appellation of origins and
provides for automatic recognition of Soviet trademarks upon
presentation of the Soviet certificate of registration.
The Law on Copyright and Neighboring Rights, enacted in August 1993,
protects all forms of artistic creation, including audio/visual
recordings and computer programs as literary works for the lifetime of
the author plus 50 years and is compatible with the Bern Convention.
The September 1992 Law on Topography of Integrated Microcircuits, which
also protects computer programs, protects semiconductor topographies for
10 years from the date of registration.
Russia has acceded to the Universal Copyright Convention, the Paris
Convention, the Bern Convention, the Patent Cooperation Treaty, the
Geneva Phonogram Convention, and the Madrid Agreement. Under the U.S.-
Russian Bilateral Investment Treaty (not yet ratified by the Russian
side) Russia has undertaken to protect investors' intellectual property
rights. The U.S.-Russia Bilateral Trade Agreement mandates protection
of the normal range of literary, scientific and artistic works through
legislation and enforcement.
While the Russian government has successfully passed good laws on
protection of intellectual property, enforcement of those laws has been
a low priority. Russian authorities are engaged in a comprehensive
revision of the Russian criminal and civil codes, including sections
pertaining to intellectual property rights which would provide
strengthened penalties, the establishment of specialized courts,
particularly a patent court, with trained and experienced judges and
attorneys, and trained police and customs officers. Until these
measures become reality, however, there is widespread marketing of
pirated U.S. (and other) video-cassettes, recordings, books, computer
software, clothes and toys. Losses to manufacturers, authors and others
are estimated to be in the hundreds of millions of dollars.
The Russian Intellectual Property Agency, established in 1992 with
direct accountability to the Russian president, was given responsibility
to develop and coordinate state intellectual property policy, promote
copyright protection, and collect and distribute royalties. It was
replaced in October 1993 by the revived Russian Authors Organization
(RAO), a semi-official agency combining supervisory functions with
advocacy of authors' commercial interests. Rospatent is the official
body responsible for registration and protection of patents and
trademarks.
Regulatory System: Laws and Procedures
The legal system in Russia is in a state of flux, with various parts of
government struggling to create new laws on a broad array of topics. In
this environment negotiations and contracts for commercial transactions
are complex and protracted. Russia has implemented only part of its new
commercial code and investors must carefully research all aspects of
Russian law to ensure that each contract conforms with Russian law and
embodies the basic provisions of the new, and where still valid, old
codes. Contracts must likewise seek to protect the foreign partner
against contingencies which often arise. Keeping up with legislative
changes and presidential decrees is a daunting task. Uneven
implementation of laws creates further complications; various officials,
branches of government and jurisdictions interpret and apply regulations
with little consistency and the decisions of one may be overruled or
contested by another. In addition, while a foreign investor may win a
favorable decision from a Russian court, enforcement of judgments is
problematic.
Legal requirements may be less burdensome than reaching final agreement
with local political and economic authorities; registration can be a
lengthy, bureaucratic process, particularly where natural resources or
defense production are involved. Corruption is widespread and the fears
of some Russian officials that foreigners will purchase Russian assets
at below-market rates can impede bureaucratic approval.
The Russian government is in the process of establishing a procurement
regime. So far that regime consists of a single law passed in December
1994 and several implementing regulations currently in preparation.
Russian officials have sought to make the law compatible with WTO
standards and note that it does not prevent market access by foreign
enterprises. However, it also gives preference to domestic suppliers
and allows the federal government to dictate supply in certain cases.
Officials also say that Russia is considering signing the WTO
procurement code as part of WTO accession.
A major complaint of foreign business is the tax system, in particular
the number of taxes, the stability of the system, transparency and due
process. Russia imposes numerous taxes including profits, excess wage,
dividend, withholding, payroll, road use, property, VAT, import and
export tariffs, excise and local taxes. These taxes may total more than
a company's profit - proving a very real disincentive to both Russian
and foreign businesses. In addition to high rates, taxes have been
changed frequently and radically, often with no warning and sometimes
with retroactive effect. Businesses are unable to rely on a particular
tax regime and may suddenly find themselves unable to make a profit.
Finally, businesses complain about the lack of due process -tax
penalties are high and do not distinguish between inadvertent and
criminal errors and the appeals process is cumbersome. The Duma is
beginning to address these problems. It passed a new profits bill,
signed into law, which repeals the excess wage tax beginning January 1,
1996. In mid-1995 the Duma was deliberating changes to the basic tax
law to address the due process, stability and transparency problems.
Finally, the Finance Ministry in 1995 was drafting a basic tax code
which should be introduced into the Duma in the fall of 1995 and take
effect in 1997.
Efficient Capital Markets and Portfolio Investment
Although undervalued Russian companies are attractive for outside and
domestic investors, significant problems currently inhibit the full
development of the market. Barriers to portfolio investment include an
uncertain tax structure, licensing requirements for investment by non-
residents, and the uncertain shape of the political landscape in the
next year. In the spring of 1995, a little-known federal service for
currency and export control revived an obscure 1992 measure requiring
licenses for hard currency foreign portfolio investment. Another major
problem area is undeveloped market infrastructure, which complicates the
settlement and clearing of trades. Shareholder rights violations also
negatively affect the investment climate and depress the market for
shares of Russia's privatized enterprises. Corporate governance in
general is a major issue, as enterprise directors regularly disregard
the rights and interests of outside investors. A joint-stock companies
bill was drafted in 1994 and the Duma approved it in the first reading
in June 1995.
Nevertheless, major portfolio investors are eyeing the Russian market
with anticipation. A Federal Commission on Securities and Capital
Markets was created in November 1994 to oversee market regulation. In
May 1995, the Duma passed a long-awaited bill on the securities market;
the bill may be signed into law by President Yeltsin by mid-summer 1995.
Investors are also encouraged by the recent establishment of western-
style registrars and custody services, and the entry into the Russian
market of major western market players.
Political Violence
The political climate in Moscow is currently stable but unpredictable
over the medium to long term. After the violent political confrontation
of late 1993, politics have returned to the floor of the legislature and
the offices of government. Political demonstrations remain modest in
size and generally peaceful. Although the February 1994 amnesty of the
leaders of the October 1993 violence in Moscow reintroduced into the
political system a number of forceful individuals, for the most part
they have sought to achieve their agendas through peaceful means. The
war in Chechnya, which began in December 1994, raised fears of terrorism
by the Chechen diaspora, especially in Moscow. By mid-1995 there had
been one such incident, the taking of a thousand Russian hostages in the
southern town of Budyonnovsk.
Crime has become one of the most frequently cited concerns of foreign
(and Russian) business, particularly those involved with large amounts
of cash and goods. While organized crime is not new to Russia, recent
years have seen an increase in the range and frequency of criminal
activity. Unfortunately, legal and judicial reforms have not kept pace
with criminal advances. Much crime is tied to commercial activity, with
one half of all entrepreneurs in a recent survey reporting that they
must pay kickbacks and protection to stay in business. Failure to make
these payments can be fatal and may generally prove a disincentive to
the creation of new businesses. President Yeltsin and his government
acknowledge that crime and corruption are major problems and have asked
the Duma to speed adoption of needed legislation. Meanwhile, Prime
Minister Chernomyrdin announced that the government will spend two
trillion rubles to fight crime in 1994-95, and adopt tougher measures
against official corruption.
BITs
Russia inherited from the Soviet Union Bilateral Investment Treaties
(BITs) with Austria, Belgium and Luxembourg, Great Britain, Germany,
Italy, Spain, Canada, the People's Republic of China, Korea, the
Netherlands, Finland, France, and Switzerland. In 1995 Russia itself
was in various stages of negotiation with Bulgaria, Greece, Denmark,
Cuba, Poland, Romania, the Czech Republic, Slovakia and the United
States. The U.S.-Russia BIT has been ratified by the U.S. Senate but
still awaits Russian Duma ratification to enter into force.
OPIC and Other Investment Insurance Programs
In an agreement ratified at the June 1992 Summit, the U.S. Overseas
Private Investment Corporation (OPIC) was authorized to provide loans,
loan guarantees and investment insurance against political risks to U.S.
companies investing in Russia. OPIC generally insures against three
political risks: expropriation, political violence and currency
inconvertibility. In 1994 OPIC did not provide inconvertibility
insurance in Russia, although in mid-1995 it announced that it was
beginning to offer such coverage on a limited basis. In 1994, to meet
the demands of larger projects in Russia (and worldwide), OPIC doubled
the amount of insurance and quadrupled the amount of finance support -
to USD 200 million in each case - it can commit to an individual
project. Through March 1995, OPIC had committed over USD 2.2 billion in
finance and insurance to 41 projects in Russia. Total investment into
these projects should reach USD 3.4 billion. In December 1994, OPIC
also committed to provide up to USD 500 million to support defense
conversion projects.
Russia is a member of the Multilateral Investment Guarantee Agency
(MIGA).
Labor
The Russian labor market continues to undergo a slow and painful
transition. The majority of Russia's workforce is suited to the needs
of the Soviet-era command economy and ill-suited to needs of an emerging
market economy. Unemployment continues to grow steadily, reaching 7.7
percent of the workforce in early 1995. In addition, another five
percent of the workforce are underemployed, forced to work short weeks,
or on extended furloughs. There is a large supply of skilled workers in
most Russian industries, but the demand for their skills is falling
rapidly. Employment is growing rapidly in banking, insurance and other
business services.
Labor-management relations in Russia are strained. Economic
restructuring has caused rising anxiety and unrest among Russian
workers, and trade unions are generally weak and ineffective. Most of
the "official" labor unions, formerly the Communist trade unions,
operate in a subservient role to enterprise management, in much the same
way they did in Soviet times. Workers have little confidence in trade
unions and most feel powerless to challenge management. The independent
unions are much more effective at the enterprise level, but because they
represent a small percentage of total workers their national clout is
very small.
The Russian government generally adheres to ILO conventions protecting
worker rights, but enforcement is inadequate. Perhaps the most
troubling worker issue in present day Russia is the abysmal state of
worker safety. Employers have generally reduced spending on safety
equipment and government enforcement of safety regulations is very poor.
Foreign Trade Zones/Free Ports
Russia has legislation from both the Soviet era and since 1991 creating
foreign economic zones. Unfortunately, the laws and their
implementation have led to a disorganized and poorly functioning regime,
with only two zones officially created - in Kaliningrad and Nakhodka.
The Russian government and the Duma have been working for some time on
new legislation to regularize and regulate free economic zones; it is
not clear when the new law will be passed.
Capital Outflow Policy
Without permission it is illegal for a Russian legal entity or citizen
to maintain a bank account outside of Russia for more than operating
expenses; licenses are required for offshore accounts and can be
difficult to obtain. Little legitimate outward investment is occurring;
most capital outflow is the result of simple capital flight rather than
a growth in criminal transactions.
Capital flight is a significant problem, with an estimated USD 40-50
billion having left the country in recent years; including some USD 17
billion in 1994. The only true method to curb capital flight will be to
stabilize the Russian economy, reduce inflation and make it a more
attractive environment in which to invest.
VIII. TRADE AND PROJECT FINANCING
Brief Description of Banking System
The Russian commercial banking system is only five years old, but it has
advanced rapidly since its inception. There are currently over 2500
banks making up the banking system, with the majority concentrated
disproportionately in Moscow, St. Petersburg and other large cities.
About one-third of the banks in Russia derive from the old state banking
system, while the rest were newly created, most as late as 1991. The
20-30 largest banks are approaching Western standards and offering more
sophisticated banking services. However, the vast majority of banks are
small and only 10 percent has a capital base exceeding $1 million. Many
banks were founded in 1991-92 by enterprises as an expedient way to
funnel directed government credits and still have the enterprise or
person which founded them as the main depositor and borrower.
More than 1000 Russian banks are authorized to deal with foreign
currency accounts, and close to 300 of these banks have general licenses
allowing them to conduct an entire range of banking transactions with
foreign currency in both domestic and foreign markets. Foreign exchange
operations account for a large part of the business of these banks. The
official Central Bank payments, settlements and clearance system is
still in the process of development, although transactions in Moscow can
now clear in as short as several days.
Cross-border, international financial transactions are now feasible as
well. More than 150 Russian banks are members of the Society for
Worldwide Interbank Financial Telecommunication (SWIFT), and others have
correspondent relationships with U.S. and other foreign banks that allow
for electronic fund transfers between Russia and other countries.
In October 1993, Citibank and Chase Manhattan Bank became the first U.S.
banks to receive general licenses to open subsidiaries in Russia.
Other Western banks operating in Russia include Credit Lyonnais (St.
Petersburg), BNP/Dresdner (St. Petersburg), and Bank of Austria
(Moscow). A November 1993 Presidential decree imposed a two-year
moratorium on the operations of foreign banks in Russia, but further
decrees issued in June 1994 and April 1995 have now confirmed that the
originally-licensed foreign banks have full banking powers. A
commercial banking bill currently awaiting approval in the Duma will
introduce a reciprocity requirement prohibiting a new foreign bank from
receiving a license until a Russian bank is allowed to enter the country
from which the foreign bank originates.
Currency inconvertibility, which used to be a major concern for Western
traders and investors, has largely been overcome by the opening of a
number of currency exchanges and direct interbank trading throughout
Russia. The largest of these is the Moscow Interbank Currency Exchange
(MICEX), which operates daily. The introduction of a Moscow City
turnover tax on MICEX operations has driven away at least one-third of
MICEX business operations, primarily to the off-exchange currency
market. U.S. companies are reporting that currency convertibility can
be easily arranged through commercial banks in Russia.
Nonresidents, including foreign individuals and foreign companies that
do not have a local subsidiary or joint venture, can open foreign
currency accounts with authorized banks in Russia. Funds in these
accounts can be transferred abroad without restriction or exchanged for
rubles on the Moscow Interbank Currency Exchange (MICEX) or through
interbank mechanisms. Foreign currency held in these accounts may be
obtained from various sources, including resources transferred from
abroad; payments from residents and non-residents for goods and services
sold in Russia; repayment of liabilities to account holder; interest
paid by authorized banks; return on investment on Russian territory; and
income from other nonresident accounts with authorized banks. In a new
development, nonresidents can also now open ruble accounts for
maintenance of domestic operations and servicing of export-import
activities and for investment activities, including purchasing of
privatization vouchers or shares of stock. However, rubles deposited in
the current operations accounts (so-called "T" accounts) may not be
converted back into dollars.
The main Russian Government bank involved in trade and investment issues
is the Bank for Foreign Trade (Vneshtorgbank, or VTB). Although VTB is
97 percent owned by the Russian government, the bank does have
commercial functions. VTB is the agent of the Russian Government for
drawing foreign credits for fulfillment of investment projects. In
addition, another foreign trade bank, Vneshekonombank (VEB), which was
declared legally bankrupt at end-1991, still acts as an agent for the
Russian Government in international banking and to service the foreign
debt of the former Soviet Union.
Currency Control & Regulation Issues
In the fall of 1993, the Russian Central Bank issued regulations that
went into effect on January 1, 1994 banning the use of hard currency in
cash transactions. Under these regulations, businesses in Russia are no
longer permitted to accept cash payments in dollars or other hard
currency, a practice which had become widespread in major cities as
consumers and storekeepers sought the convenience and security offered
by a more stable and trusted currency. Non-cash transactions (e.g.
credit and debit cards and checks) are not affected by the new
regulations, so establishments that previously accepted payment via
credit cards can continue to do so. Stores that sell imported goods are
still allowed to mark prices in dollars. At the time of purchase clerks
convert the dollar price into rubles. Through the exchange rate they
employ, merchants pass on the additional costs they will incur when they
convert the rubles back into hard currency to restock inventories.
Russian resident entities are still required to convert 50 percent of
their foreign-currency revenues from exports of goods and services. The
foreign currency must be sold through MICEX or any authorized foreign
exchange dealer. There has long been discussion in Russian government
circles of increasing the mandatory exchange obligation from 50 to 100
percent to further strengthen the ruble, but no such measures have been
enacted.
The Moscow City Government enacted a 0.1 percent tax on all foreign
exchange transactions on the Moscow Interbank Currency Exchange (MICEX)
effective March 1, 1994. The result has been that a number of banks
have shifted their exchange activity from MICEX to the off exchange
market. Currently, the entire exchange-based market in Russia accounts
for anywhere from ten to 30 percent of the average daily exchange
volumes, depending on volatility. Just as on the MICEX, the CBR now
intervenes in the off-exchange market to narrow the spread between the
two markets exchange rates. In an effort to limit the outflow of
capital, the Central Bank introduced a computerized export control
system to monitor the flow of goods out of the country and the flow of
hard currency bank in. The system, which unites for the first time
banking and export controls, requires exporters to obtain a special
"passport" from a commercial bank, which enters the trade in a computer
database. Customs agents register the actual export of the goods in the
database and the commercial bank completes the cycle by entering
receipt of the payment. Strategic exports, including energy and several
types of metals, were subject to the new regime as of January 1, 1994.
The system took effect for all other types of goods on March 1, 1994.
Availability of Financing
The financing environment in Russia remains problematic as the economy
continues to experience great difficulties, and the Russian government
and banking system are able to provide little trade and investment
financing either to Russian companies or foreign firms. However, a
number of bilateral and multilateral financing programs, outlined below,
are open for Russia which could provide more opportunities for traders
and investors.
How to Finance Exports/Methods of Payment
The fact that the Russian Government has been unable to date to resolve
the issue of outstanding commercial arrears to western companies
continues to have a negative impact on the environment for trade
financing. Beginning in 1989, Soviet foreign trade organizations began
have difficulty making payments for goods they had purchased under
contract from U.S. and other Western companies. These cases all
involved imports under open accounts, which had been the standard way of
doing business in the Soviet Union for decades. When pressed for
explanation, the foreign trade organizations claimed sufficient hard
currency had been deposited in their accounts at the Bank for Foreign
Economic Relations (Vneshekonombank, or VEB, then the only Soviet bank
authorized to deal in hard currency), while VEB claimed the FTOs did not
have sufficient funds to cover the contracts. The U.S. Government began
advising U.S. companies only to sign contracts in the Soviet Union, and
then Russia, on the basis of letters of credit or prepayment.
Since 1990 when U.S. companies first began reporting payments delays,
the Department of Commerce and other U.S. Government agencies have
interceded on behalf of more than 70 companies collectively owed more
than $350 million. At the end of 1991 the situation grew worse with the
effective collapse of Vneshekonombank. In addition to the arrears
problem, VEB stopped payment on its letters of credit and froze all hard
currency accounts. Currently, according to VEB officials, commercial
arrears stand at $5 billion, frozen accounts at $10 billion, and unpaid
letters of credit at over $1 billion.
In December 1992 President Yeltsin signed a decree announcing that hard
currency-denominated bonds with a maturity of three to 15 years and an
interest rate of three percent would be issued to account holders. The
Russian Government began issuing bonds in 1993, and the first tranche
came due in mid-May 1994 and were paid according to schedule. Joint
ventures whose funds were frozen will receive payment in three tranches
over six years from the date of issuance, and foreign trade
organizations (who owe U.S. and other Western companies) will receive
their bond payouts in two tranches over fifteen years. Estimates are
that bonds have been issued for sixty percent of the accounts.
Bankers in Russia and the West are actively trading billions of dollars
of VEB bonds. Reports indicate that of the sixty percent of VEB bonds
which have been issued, about $1 billion have been sold on the market.
If the market for VEB bonds does grow, it may provide a mechanism for
Western suppliers pursuing repayment of their commercial arrears.
However, many suppliers are reluctant to accept the VEB bonds as
repayment for outstanding commercial debt.
In November 1993 then-Deputy Prime Minister Shokhin announced that the
Ministry of Foreign Economic Relations had been given the authority to
negotiate the rescheduling of private commercial debts on a country-by-
country basis. Negotiations would cover unpaid transactions, but not
frozen accounts or unpaid VEB letters of credit. More recent reports
suggest that the Ministry of Finance may be taking the lead on repayment
of private trade debts with plans to negotiate a single arrangement for
all foreign companies.
The result of this payments quagmire is that foreign companies now
generally trade with Russian companies only on the basis of prepayment.
Letters of credit are issued by Russian banks only in those cases where
the Russian customer can deposit the requisite funds in its account
ahead of time, and Western banks generally will only confirm letters of
credit on that basis as well.
The financing opportunities that do exist primarily are through Western
government trade and investment programs or new programs under
international financial institutions.
Types of Available Export Financing and Insurance
U.S. Export-Import Bank
There are several U.S. Government trade financing programs in place
which can be of assistance to U.S. companies exporting to and investment
in Russia. The U.S. Export-Import Bank provides short- and medium-term
insurance, loan and guarantee support for transactions involving VTB and
VEB, acting on behalf of the Russian Federation. Before processing
applications for sovereign risk transactions, Eximbank requires
clearance from one of these banks. A confirmation from the Ministry of
Finance is needed for medium-term transactions. As of June 1995,
Eximbank's overall sovereign risk exposure was approximately $700
million. In addition to sovereign risk transactions, Eximbank has
extended guarantees on a $15 million credit line to Tokobank.
OPIC
In an agreement ratified at the June 1992 Summit, the U.S. Overseas
Private Investment Corporation (OPIC) is authorized to provide loans,
loan guarantees, and investment insurance against political risk to
American companies investing in Russia. OPIC generally insures against
three political risks: expropriation, political violence and currency
inconvertibility. In June 1995 OPIC announced that it would begin
offering currency inconvertibility insurance on a limited basis.
In 1994, to meet the demands of larger projects in Russia (and
worldwide), OPIC doubled the amount of insurance and quadrupled the
amount of finance support -- to $200 million in each case -- it can
commit to an individual project. Through the midpoint of fiscal year
1995 (March, 1995), OPIC had committed over $2.2 billion in finance and
insurance to 41 projects i